Eighteen years ago, my daughter was born. Like most new fathers I went through all the emotional ups-and-downs of parenthood. I still have fond memories of her laying on my forearm in the middle of the night while I was watching those late-night west coast hockey games. Now, she’s heading off to college, which sets off a whole new set of feelings.
Education has always been important to my family. The value was instilled by my great-grandparents who made it a point that, against all odds, the children be well educated. When I became a parent, I researched and devised a plan to afford to send my children to college, just like my great grandparents did.
529 Plans are the most commonly known tools used around the country. The idea is rather simple and similar to an IRA Retirement account, but for education. 529 plans can be opened for the benefit of the child and money can be invested in a variety of ways. The principle grows tax deferred and if the proceeds are used for qualified educational expenses, the withdrawals are tax free.
A subset of the 529 allows for prepaid tuition programs. In Michigan, it is commonly known as the MET (Michigan Education Trust) Contract. Michigan is one of nine states to offer these prepaid tuition programs. The general idea is that you lock in and pay for future undergraduate tuition at today’s undergraduate tuition rates. There are a variety of different payment options, along with different levels of tuition to prepay for. The most common objections people have with these programs is cost and perceived lack of mobility. So, lets address those concerns.
The MET’s Full-Tuition plan for any in-state university pays the full tuition and fees for the prepaid semesters regardless of any increases in tuition. The state offers a Limited-Tuition plan that is a bit less expensive, but still fully covers tuition at the majority of Michigan’s universities. Once your student determines where they will attend and is enrolled, simply notify MET and they will make the tuition payments for you. That is great if your student is staying in state, but what if they decide to attend a university out of state?
Most people think the MET is wasted if the student attends an out of state school. As a parent that had that very same concern, let me tell you, that is not the case. If your child attends a university in a different state, the MET will still pay, just differently. Instead of the payout adjusting in accordance with any annual changes in tuition rates, the out-of-state payout is a fixed amount. If you purchased the Full-Tuition plan, in year one, the MET takes the average cost of in-state tuition across all of Michigan’s public universities and sets that as the annual payout rate for the contract term. For example, if the average cost of in-state tuition in Michigan is $14,000 the year you begin withdrawals, then the MET will pay $14,000 a year for the number of years you prepaid. You still receive the benefit of the payout being at the future tuition level, you just lose the benefit of the payout adjusting for any annual tuition increases. However, even using this fixed out-of-state payout, the return from your initial investment is significant. If this example, if you bought the plan when your child was first born, that same $14,000 tuition would have cost you around $4,500.
A survey from U.S. News & World Report found that the average cost of in-state tuition and fees to a public university over the last 20 years has risen just over 210%, or over 10% annually. This is a hard pace for investments to keep up with.
The idea of paying a full four-years’ worth of tuition upfront can be rather tough to swallow and likely a hard financial burden on many young families still trying to come to terms with how many diapers their child seems to keep going through every week. However, if you can find a way, it is ultimately worth it. Now, for grandparents looking to leave a legacy to their grandchildren, what better gift is there? At Bloom Advisors, we love helping grandparents include college planning as part of their estate plan.
Keep in mind that prepaid tuition programs only cover the tuition and fees. Students generally have a multitude of other expenses, like room and board, books, technology, equipment, etc. These are all expenses that are payable with 529 savings. For this reason, it can be worthwhile to have a 529 plan in addition to a prepaid tuition plan.
Another key difference is that prepaid tuition programs only cover tuition for undergraduate bachelor’s degrees, whereas savings in a 529 plan can be used to cover the costs associated with post graduate degrees as well. So, if you find that you have over-saved for the expenses related to your student’s undergraduate degree, those savings can continue to be used for most post-graduate expenses. No matter what methods used or how you go about it, this investment in education is probably one of the biggest and most important investments that you can make for your family. The resulting benefits can be timeless and create a legacy to be proud of.
